Bond Definitions

Question 1

Ask price

Answer 1

Price security can be purchased for

Question 2

Asset backed securities

Answer 2

Specific assets serve as collateral for a loan

Question 3

Balloon PMT bond

Answer 3

bond where payment at the end is the largest

Question 4

Basis Point

Answer 4

1/100th of a point or 0.01%

E.g. 90 bp = 90/100

Question 5

Bid price

Answer 5

sale price investor receives from dealer,

Question 6

Bid-ask spread

Answer 6

price security can be purchased for - price security can be sold for

Question 7

Bond

Answer 7

IOU on debt, that pays back principal and interest

You get at least principal back sometime interest

Question 8

Bond issuer

Answer 8

the original owner of the bond, that makes the payments and principal payment

Question 9

Bondholder

Answer 9

the person who buys the bond and gets the interest payments

Question 10

Collaterized Mortgage Organization

Answer 10

security backed mortgage

1. Investor make payment to intermediary, that is repackaged as loan / mortgage. Investors have a right to those future CFs.
2. Lender makes mortgage payment back to intermediary w interest, then it goes to investor.

No consequence in lenders do not pay mortgage

Question 11

Duration

Answer 11

measures how long you get CF relative to market interest rates

Question 12

Hedge Fund

Answer 12

Mutual fund for the rich that is not SEC regulated, less diversification but more exclusive investors

Question 13

Load Fund

Answer 13

mutual fund with a charge either at purchase or at sale

Question 14

Money Market Fund

Answer 14

open ended mutual fund, good for when inflation rates are high

rarely insured so buy government backed securities

can switch to other MF without charge

Question 15

Mortgage

Answer 15

Loan collaterized by land / buildings

If borrower defaults, lender can sell the property and keep amount owed. Any excess goes to the borrower.

Question 16

Municipal Bond

Answer 16

Debt of state / local government entity

Tax free at the federal level, taxable at state level if you live in that state

Better for the rich because of tax breaks, even with lower yields

Question 17

Mutual Fund

Answer 17

Fund operated by an investment company that raises $ from shareholders / investors to invest in a variety of assets

Risk levels vary

Question 18

No load fund

Answer 18

Mutual fund offered by an open end investment company, with no sales charge

No broker involvement

Question 19

Perpetual bond

Answer 19

Bond version of a perpetuity

No maturity date and not redeemable

Question 20

Zero Coupon Bond

Answer 20

No periodic interest payments, redeemed on maturity date

Owe taxes income accrued each year

Good for specific goals e.g. college planning

Question 21

Zero Coupons and Interest

Answer 21

More fluctuation when interest rates rise because they do not pay interest

When interest rates are falling zeros are more valuable because their interest rate is locked in

Question 22

Bonds in rising interest rates

Answer 22

Sell / short because prices will go down because y is the denominator

Question 23

Bonds at low interest rates

Answer 23

Price will be higher so better to try and buy before interest rates fall

Question 24

Interest rates and duration / TTM

Answer 24

Bonds with longer durations / TTM are better

Question 25

High coupon bonds CF

Answer 25

More CF